Suzhou Institute of Building Science GroupLtd (SHSE:603183) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Suzhou Institute of Building Science GroupLtd (SHSE:603183) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Suzhou Institute of Building Science GroupLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.088 = CN¥137m ÷ (CN¥1.9b - CN¥361m) (Based on the trailing twelve months to September 2023).

Thus, Suzhou Institute of Building Science GroupLtd has an ROCE of 8.8%. On its own that's a low return, but compared to the average of 6.9% generated by the Construction industry, it's much better.

Check out our latest analysis for Suzhou Institute of Building Science GroupLtd

In the above chart we have measured Suzhou Institute of Building Science GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Institute of Building Science GroupLtd .

What Can We Tell From Suzhou Institute of Building Science GroupLtd's ROCE Trend?

In terms of Suzhou Institute of Building Science GroupLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.8% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Suzhou Institute of Building Science GroupLtd's ROCE

To conclude, we've found that Suzhou Institute of Building Science GroupLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Suzhou Institute of Building Science GroupLtd does have some risks though, and we've spotted 2 warning signs for Suzhou Institute of Building Science GroupLtd that you might be interested in.

While Suzhou Institute of Building Science GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.